The aerospace sector is expected to recover in 2023, but challenges loom for the second half of the year, said Richard Aboulafia, analyst and managing director at AeroDynamic Advisory, in a recent webinar.
Aboulafia sees a general recovery to pre-pandemic levels by next year, despite extended lockdowns in China — where domestic travel is down by 70pc — adding to the uncertainty.
"We see things coming back to pre-pandemic levels in 2023 or early 2024," he said. "It has been a choppy recovery, but our expectations haven't changed, and I still believe we are on the right track as people are coming back to travel."
The return of travel demand is coupled with stable backlogs from aircraft manufacturers Airbus and Boeing. But despite positive signals, there are also several risk factors. One is pandemic-related supply chain disruptions, which have been aggravated by the Russia-Ukraine conflict.
"The aerospace industry faces several near and long-term supply chain bottlenecks," Aboulafia said, anticipating that these will persist throughout 2022.
In the short term, the sector is facing a shortage of microchips, engineered components and machine parts, while in the medium term the bottlenecks will hit mostly forging, high-performance alloys and diecasts, Aboulafia said.
Supply chain issues impacting critical materials such as titanium sponge and rare earths will take more time to be solved, while demand for them is set to increase. At the moment, for instance, the long-awaited recovery of aerospace demand is evidenced by higher titanium sponge imports in countries such as the US, but supply chain bottlenecks continue to cause severe delays in shipments. "Next year it will be the big question mark, how the disruptions affect contractors, particularly, single-aisle jets, the high-value aircraft."
Fuel prices pose a risk to recovery too, according to Aboulafia. "Prices of fuel are a concern for the industry," he said. "It is impossible to predict the oil prices, and a lot will depend on what happens in Russia, but we expect oil prices to fluctuate between $80-100 a barrel in the second half of the year."
Inflation challenges remain, he added, and so does the prospect of high interest rates. At the moment, the US inflation rate is 8.26pc, compared to 4.16pc last year, while inflation in the Eurozone has jumped to a new record, above 8pc, mainly driven by high energy prices. "There is the risk of high interest rates but at the moment we project them at just below 5pc, and if they keep at that level, that would not be too catastrophic".
Aboulafia also noted divergent recovery paths for defence and commercial aviation.
"For years commercial aviation led the recovery from other crises, but this is not the case anymore," he said. "The US Department of Defence investment accounts are much stronger than before… It looks like we are going to have a record budget for procurement, for research and for market development."
"The defence side is going to be able to put up with the inflationary impact of an overheated economy, whereas the commercial side is going to be challenged both when buying raw materials and hiring people," Aboulafia said.
